4. On January 2, 2016, Danner Corp. purchased 32,000 shares (40%) of the common

Question

4. On January 2, 2016, Danner Corp. purchased 32,000 shares (40%) of the common stock of Poe & Company. The purchase price was $320,000. Danner has significant influence over Poe. No amortization is required. During 2016, Poe reported income of $126,000 and paid dividends of $30,000. On January 2, 2017, Danner sold 4,000 shares for $51,500.

Required:

a. Compute the balance in Equity Investment at December 31, 2016.

b. Prepare the journal entry to record the sale of the 4,000 shares.

c.    What was the balance in Equity Investment after the shares were sold

Explanation / Answer

Answer :

Part :-a

Balance of equity investment at December 2016 is Purchase price which is &320,000 because though the company has significant influence and 40% share holding his treatment off investment does not change and it implies that it is a long term investment. As per guidance notes long-term investment is valued at cost . So investment is valued at $320,000.

Part:-b

=$320,000/32000

=$10 per share

To investment a/c. $40,000

To Profit on sale of investment a/c. $11,500

Part :c

Balance of equity after Sale is

Opening balance : $320,000

Less cost of sale : $40,000

Value of investment : $280,000

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